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Imagine this: You're on the cusp of retirement, a lifetime of hard work behind you, and now you face the million-dollar question — how much can you safely withdraw from your savings each year without running out of money?

This is, of course, everyone's biggest fear surrounding retirement. Most people are actually more afraid of running out of money than they are of death. And it's understandable; the stakes are so high. No one wants to be healthy and active at 90 only to realize they can't afford it.

Enter the 4% rule, a retirement strategy that's been tossed around like gospel for decades.

But in 2024, is it still the holy grail it once was? Let's dive into the nuts and bolts of this rule and see if it still holds water today.

What Is the 4% Rule?

It's easy to see how the 4% rule got so popular. It's like the Swiss Army knife of retirement planning — simple, reliable, and handy. Devised by financial advisor Bill Bengen in the 1990s, it suggests you can withdraw 4% of your retirement savings in the first year, then adjust that amount for inflation each subsequent year.

The goal? To stretch out your savings over a 30-year retirement, with complete certainty that it will last.

Bengen created the rule by sifting through stock and bond returns over a 50-year period from 1926 to 1976 — a timeframe that included some of the most tumultuous economic events in history, such as the Great Depression and the severe market downturns of the early 1970s — hoping to identify a withdrawal rate that could withstand even the harshest economic conditions.

According to Bengen's analysis, there was no point in that period where a 60/40 portfolio would have “run out of money” in less than 30 years as long as you followed the 4% rule. In fact, despite the worst financial situations, even the shortest-lived portfolio in his study still lasted 33 years.

At the time, after reaching the average retirement age of 65, men in America usually lived about 15 more years and women lived just under 20; devising a strategy that could stretch a portfolio out more than 30 years seemed not only sufficient but conservative to boot, providing a five- to 10-year buffer to account for increasing lifespans.

Since its origin in the mid-1990s, the 4% rule has withstood the test of time. Financial advisor Michael Kitce has written multiple analyses putting the 4% rule up against more recent economic downturns (2000 tech-bubble crash, 2008 global financial crisis, COVID-19, sky-high inflation) and came away with the same analysis each time — “nowhere near bad enough to 'break' the 4% rule.” [link to article on Kitces.com: https://www.kitces.com/blog/4-percent-rule-bengen-morningstar-report-the-state-of-retirement-income-safe-withdrawal-rates/]

Making the 4% Rule Work in 2024

Ultimately, Bengen's 4% rule was designed to give retirees a reliable, easy-to-follow strategy that would make their savings last through even the worst economic landscapes, providing them with something even more important than money — peace of mind.

If that sounds like your idea of the perfect retirement strategy, you'll be happy to hear that it's still largely applicable today.

The nuts and bolts of the strategy are easy to apply. You start with a retirement portfolio split between 60% stocks for growth and 40% bonds for stability. In your first year of retirement, you withdraw 4% of the portfolio, leaving the other 96% to continue growing and earning interest. Every year after that, you adjust the amount to match inflation, essentially giving yourself a cost-of-living adjustment.

So, let's say you start with a million-dollar retirement portfolio. The first year, you'd withdraw $40,000. Going into the second year, the inflation rate is at 2%, so you adjust your $40,000 withdrawal by 2% to match — 2% of $40,000 is $800 — giving you a new withdrawal limit of $40,800. As your third year rolls around, inflation has jumped to 9% (yikes!), so you go back to your initial 4% withdrawal amount ($40,000), adjust it by 9% to match inflation (9% of $40,000 is $3,600), and come away with a withdrawal limit of $43,600.

While the 4% rule has long been a gold standard in retirement planning, nothing in finance is ever actually “one size fits all.”

Everyone's financial situation is different, and what works for one person might not work for another. If you've got a hefty retirement portfolio, withdrawing 4% every year might be excessive. On the flip side, if your savings are on the leaner side, 4% might not be enough to cover your needs.

Even Bill Bengen, the rule's creator, saw the need for adjustments. Over the years, he's suggested that a 4.5% withdrawal rate might be safe under certain conditions. But with inflation rearing its ugly head recently — think 9.1% last summer and now around 6.5% — even 4.5% might not cut it. Retirees today need more money just to keep their lifestyle afloat, which means their savings could deplete faster than they'd like.

Then there's the rigidity of the system. For the 4% rule to work, you need to strictly follow it every year. If you withdraw more than the limit in a single year, you could reduce the principal by too much, which would directly impact the amount of portfolio growth you can expect going forward.

That means no big one-time purchases or expenses... and retirement expenses are anything but predictable. Health costs alone can be staggering. The average 65-year-old couple can expect to spend over $300,000 on medical bills. And people are living longer, sometimes well past 100, so your money may need to last longer, too.

Given all this, financial experts suggest more conservative approaches. A recent study by Morningstar recommended starting with a 3.8% withdrawal rate to provide a buffer against inflation and market volatility. This lower rate helps ensure you won't outlive your money. Some advisors say a 5% withdrawal rate could give you a more comfortable lifestyle with only a bit more risk. (Bengen recently said he personally employs a 4.7% rule.)

In essence, the 4% rule is a solid foundation, but it's not set in stone. Working with a financial advisor can help you tailor a strategy that accounts for your personal needs, market conditions, and inflation, ensuring your retirement is both stable and comfortable.

Remember, the 4% rule is just that — a rule of thumb. Your best bet is to consider your personal circumstances, consult with a financial advisor, and tailor a plan that ensures your golden years stay golden.